The market’s ongoing obsession with Fed monetary tightening will eventually fade to the back burner as expectations get increasingly “priced in”.
Chief Investment Office, Hou Wey Fook 28 Jan 2022
- Fed adopts hawkish stance in FOMC meeting by refusing to rule out aggressive rate hikes
- Rising bond yields and positive growth momentum have generated strong average annual returns
- Beyond the current bout of market correction, risk assets will resume their uptrend
- The outlook on corporate earnings remains upbeat, particularly in on the Technology front
- Never “waste” a market correction
Hawkish Fed – But this will not herald the start of a bear market. Federal Reserve Chair Powell has in the Federal Open Market Committee meeting maintained the end of quantitative easing in March and signalled the imminence of policy rate hikes in coming months – no surprises here. However, Powell’s stance on being “nimble” on inflation as well as his refusal to rule out more aggressive rate hikes was widely seen as a sign of hawkishness – driving sharp overnight spikes in US Treasury yields.
Global risk assets have, without question, undergone substantial correction since the start of the year as investors grapple with the ramifications of imminent monetary tightening after years of central bank largesse. But our stance on this remains unchanged: the Fed hiking policy rates on the back of an improving economy will not derail the equity markets and our analysis of historical data validates this view.
Rising Bond Yields + Rising Growth Momentum: Historically generated highest average returns on S&P 500. To analyse how bond yields and growth conditions can impact the trajectory of the S&P 500, we looked at annual data stretching back to 1963, and drew the following conclusions:
- The prevailing combination of rising bond yields and growth momentum has historically generated the highest average annual returns of c.15% for the S&P 500
- Regardless of rising/falling growth momentum, falling bond yields have, in general, been positive for risk assets with returns averaging at c.8-10% for S&P 500
- The combination of rising bond yields and weakening growth momentum has historically generated the worst returns for S&P 500
Based on consensus forecast, US growth domestic product and corporate earnings are poised to grow 3.8% and 19.7%, respectively, in 2022. Clearly, the market is currently in the “rising bond yields and rising growth momentum” category and this is constructive for the outlook of risk assets.
Look beyond the Fed and focus on corporate fundamentals instead. The market’s ongoing obsession with Fed monetary tightening will eventually fade to the back burner as expectations get increasingly “priced in”. Instead, investors will divert their attention to corporate earnings and on this front, we are particularly upbeat on the Technology-related space.
Never “waste” a market correction – Apt time to adopt longer-term view and build strategic positions in secular themes. Expect volatility to stay elevated as markets navigate through the initial phase of Fed monetary tightening. We advise investors to maintain rationality and see this policy tightening phase as a necessary transition as economies return to normalcy. Our portfolio recommendations are:
- Gain exposure to secular themes in CIO Barbell Strategy
- The haves and the have nots – Quality plays to outperform
- Gold displaying resilience in a storm
